Options Strategy: The Wheel -- with David Moadel
hey everybody and welcome to looking at the markets with David Modell for you
options traders out there or you're thinking about trading options here is a
very simple and repeatable strategy it's called the wheel the wheel options
strategy it's called the wheel because well I'm going to show you what it looks
like the strategy kind of resembles a wheel and it's cool because you can do
it over and over again now before you get started you need to know that first
you need to have options trading permission with your broker so you're
going to want to contact if you want to do this you're going to want to contact
your brokers customer service and find out what permission of options trading
you have do you have permission to sell covered calls you probably do if you
have an options trading account because that is usually the lowest and simplest
level of options trading selling covered calls but you also to do the wheel
strategy you also need to be able to sell a put option a cash covered put
option and that means that you're going to sell a put and then you'll have the
expectation of possibly and hopefully getting assigned so that a hundred
shares of the stock will be put to you meaning you'll have to buy a hundred
shares at the strike price of the put option contract that you sold and you'll
need to have the cash available in your brokerage account to buy and pay for 100
shares of that stock so this is something you should only do if you have
that permission first of all you'll need to have permission to sell cash covered
put options and also permission to sell covered calls on a hundred shares of
stock also you need to be able to afford to buy a hundred shares of stock and so
you might not be able to do this on a more expensive stock like Amazon or
Google or something like that but if you can great if not then you might need to
look for less expensive stocks that are optional meaning that
you can buy and sell options on them okay and both parts of the wheel
strategy involves selling options at no point are you buying options in the
wheel strategy although you will be buying 100 shares of stock so let's take
a look at the wheel and how it works alright so here's your wheel
I drew it and I'm not very good at drawing so hopefully you will forgive me
for that alright the first part of the wheel strategy for options is you sell
the put option and that's going to be a cache covered put and only do this if
you have the cash available to buy 100 shares of a stock and if you really want
to buy 100 shares of that stock okay don't do this for anything you cannot
afford to buy and any stock that you cannot or do not want to buy a hundred
shares of alright never sell a cache covered put option if you're afraid of
the price of the stock going down and you might have to buy the 100 shares of
stock if you're afraid to do that don't do this okay this is something you
really want to buy a hundred shares on alright so you sell your put option and
what should the strike price be what should the expiration date be that's up
to you that has nothing to do with the wheel strategy I have a tendency to sell
an at the money cache covered put option just because you get the the greatest
premium payment up up front compared to the amount of risk that you're taking on
so that's my preference but that has nothing to do with the wheel strategy
itself also expiration date a lot of people have said that 45 days out is the
way to go or as close to that as possible or
perhaps at least 30 to 60 days out closer to 45 is even better when it
comes to selling a cache covered put option but again that's up to you that
has nothing to do with this strategy alright so first step is sell a cache
covered put option okay now what if you don't get assigned ok let's say you sell
the cache covered put option and then the price of the stock just goes up and
you it never goes below or doesn't stay
below the strike price okay so you will not take ownership of 100 shares of
stock but you got paid a premium payment from selling that put option so you win
really I mean you know you got free money basically you sold what ended up
being a worthless contract put a put option contract so nothing wrong with
that it's tough luck for the person you sold the put option contract to but
pretty good luck for you and good strategy okay but you're kind of hoping
to get assigned because by getting assigned you can then continue through
the wheel which goes clockwise here okay so if you do get assigned okay let's say
the the price of the stock goes down and now you get assigned you get put 100
shares of the stock okay get assigned that's the next part of the
wheel and so I guess I should have drawn an arrow from here to here but my
drawing skills are terrible so I hope you'll forgive me okay so you get
assigned now you own 100 shares of that stock alright so the contract the put
option contract is not valid anymore because it was exercised you own 100
shares of stock probably add an unfavorable price unfortunately so
you're you're down a little bit on your purchase of the 100 shares although you
did get paid a premium payment up front for selling the put option so maybe
you're maybe you're not behind very much in fact you could actually be ahead a
little bit there or break even perhaps alright but that's
not the end okay so you get assigned alright and so you're probably behind in
terms of the stocks are down a little bit all right compared to where you
bought had to buy a hundred shares okay so you're down on your stock position
your hundred shares no big deal alright you got a sign you were ready for that
okay you were willing and able to buy those 100 shares even not at the best
price necessarily okay you got assigned what's next well now you have 100 shares
do you just sell them for a loss no you don't sell those hundred shares for a
loss necessarily not if you want to use the wheel strategy I mean it's up to you
what you do you know don't do something because I'm telling you to do it or
because anybody told you to do it alright
you have to make your own decisions so you have a hundred shares of stock and
you decide yeah you want to continue around the wheel so here we go what's
the next step you start selling covered calls alright and this is a process that
might take a while so let's say you sell a covered call where do I sell it
usually at the money okay what expiration date
well 45 days is pretty good but that's up to you you know between 30 and 60
days is pretty good in my experience and selling an app the money get a decent
premium payment upfront right you know cash right into your account for selling
that covered call on those hundred shares all right and so you start
selling covered calls so you sell a covered call and if the stock price goes
up above the strike price and you get a signed great you sold your shares all
right now make sure that strike price is at least where you want that strike
price not to be too low okay because you don't want to sell for a huge loss on
that hunt on the hundred shares of stock all right so you want to make that
strike price at least where you bought the stock where you bought the hundred
shares so you won't have to take a loss on the hundred shares of stock that you
bought all right that that's you know at the money I would say so I'm selling an
at the money put meaning you know about the price where I where I was assigned
alright so I'm not taking a huge loss so I'm selling a covered call now let's say
let's say I sell it 45 days out 45 days come and go and I don't get assigned the
stock just stays down alright so if I don't get assigned then I just keep
selling covered calls I sell another one and another one until I finally get
assigned if you get assigned the very first time you sell a covered call great
okay if you don't you know the hey at least you're collecting premium payments
because you keep selling covered calls until you get assigned which may take a
while or it may happen quickly if the stock just depends on when the stock
price goes up above the strike price right
supplied again you know if the stock price keeps going down and down and down
don't keep selling lower and lower and lower strike covered calls that's not
the idea all right if the strike if the stock price just
keeps going down then you may have to wait you may have to wait for the stock
price to come back up before you keep on selling those covered calls because you
don't want to sell your shares super super low that's not the idea okay you
may have to wait until it comes stock price comes back up to about where you
had to buy them when you got assigned from the put option okay so you sell
covered calls until what happens until you get a sign and hopefully you'll get
assigned either at the same price you got a sign here with the put option ok
the price where you bought the stock or maybe even higher try not to do it lower
if you can help it alright you're not trying to sell for a
loss with the stock and so let's let's say what if these two prices were the
same let's see bought a hundred shares and then you sold a hundred shares at
exactly the same price okay so you meaning the strike prices were the same
all right so you collected a premium payment when you sold the put up that
you know the cash covered put option in the beginning and then you got paid
again and again or at least once with the covered calls that you were selling
all right and so you got paid just through the options even if you didn't
get paid you know with the with the stock actually you can get paid with the
stock even if that happens because let's say you collected a dividend payment
along the way that could happen you get assigned 100 shares of stock and even
though you sold a covered call you know you can still collect dividend payments
as long as you own those hundred shares you're entitled to those if you get them
all right but once you sell your stock shares then you know you're done
collecting dividend payments if you did it all all right so three possible ways
to make money actually for really when you sold the put right cash covered put
when you sold covered calls maybe a dividend payment as a third way you can
get paid and then there's a fourth possible way if you if you put the
strike price over the of the covered call that you're selling or covered
calls if you put them higher okay higher than the
you know where you bought the shares which some people choose to do so you'd
be selling it out of the money covered call and then you might make some money
off of the price appreciation of the stock shares until you get assigned so
that's another possible way okay for possible different ways to gate to make
money but you're at least making money from two ways selling the put and
selling the covered call or calls all right and you go through the whole wheel
and then you just repeat it until you get rich thanks a lot bye